Do Long-Term Investors Care About Inflation?

Abstract:     
Even though inflation has a tremendous effect on the outcome of a long-term financial investment, banking practice largely abstains from presenting information in terms of inflation-adjusted (real) returns. The paper’s objective is to investigate how far this restriction of information matters and whether real return information should be made available to long-term investors. In an experimental study, an interactive software program allowed 133 subjects to adjust the return distribution of an initially chosen stock/bond mixture of a buy-and-hold strategy. In this process, they were able to switch the presentation type between nominal returns and real returns at any point in time. This experimental design allows us to (1) quantify the interest in nominal and real return information and to (2) document interdependencies between the nominal vs. real presentation format choice and decision-making behavior. The selected stock proportion of the buy-and-hold investment differs significantly across user-selected views (nominal or real returns). The participants’ customization of the return distribution is also correlated to the information condition.

Number of Pages in PDF File: 20

Keywords: decision analysis, distribution builder, experimental economics, money illusion, inflation

JEL Classification: D81, C91

working papers series